Major Cycle*(Long-term trend lasting several months to years) Positive

* Cycle status is based on S&P 500.

Now things get interesting…

On May 22 not only did all of the major indexes top out on the Minor Cycle (1687.18—S&P 500) that had been in effect since the April 18 short-term lows (1536.03—S&P 500), but all also traced out rare Key Reversal Day (KRD) formations which, historically, can be bearish.

In the wake of those highs the S&P pulled back 7.5%, the Dow Jones Industrial Average 6.3%, the NASADAQ Composite 6.7%, and the Value Line index 6.3%. All have since recovered modestly in the face of short-term “Oversold” conditions, statistical support at the lower edge of 10-Week Price Channels with the recent suggestion the market was overdone on the downside as measured by our VIX-based volatility indicator.

Market Overview – What We Know:

All major indexes posted modest gains last week. NASDAQ Composite rallied the most with a 2.23% advance.

Trading volume due to truncated holiday week was down 45% relative to previous week.

Minor Cycle in S&P 500 has taken on more positive tone with price strength above upper edge of 10-Day Price Channel. To reverse that favorable trend S&P must decline below lower edge of Channel (1593.29 through Monday). Intermediate Cycle remains positive and S&P must decline below lower edge of 10-Week Price Channel (1602.69 through July 12) to reverse extant trend to negative. Major Cycle remains positive and historically “Overbought.”

Our short-term volatility indicator based on VIX data was last positive, but indicator has rapidly returned toward levels of vulnerability that developed into May 22 highs.

Daily MAAD moved higher last week, but remains below May 22 short-term high and is still above an uptrend line in effect since November’s lows. Daily MAAD Ratio was last just above marginally “Overbought” point at 1.33 while with Weekly MAAD Ratio was modestly “Overbought” at 1.44.

Daily CPFL rallied to new short to intermediate-term high June 11, remains below that level and uptrend line stretching back to November lows. Daily CPFL Ratio was last near “Neutral” at 1.03 Weekly CPFL Ratio marginally “Overbought” at 1.29.

Cumulative Volume (CV) in both S&P 500 and S&P Emini futures contract has continued to underperform pricing. CV in S&P Emini has only recouped about 25% of losses since May 22 highs while cash S&P has come back nearly 50%.

While some have suggested selling from May 22 to June 24 was merely a “corrective phase” in an otherwise positive Intermediate Cycle begun last November 16 that is still operating within the context of a still positive Major Cycle advance begun in March 2009, we wonder if they might be overlooking some significant clues after the recent decline and the nature of the “recovery” since then.

There is also potential for new negativity in our VIX-based volatility indicator that has rapidly moved back to levels reached just before May 22 index price highs.

Lacking strength that will ultimately carry prices back above May highs and potential Key Reversal Day (KRD) highs (1687.18—S&P 500), only presumption left is that May highs were also top of Intermediate Cycle uptrend begun last November 16 and that tone of market could remain negative until Intermediate Cycle eventually slips into buying zone.

How intermediate trend plays out will ultimately determine staying power of Major Cycle advance begun in March 2009.

Fact sellers have continued to push prices lower after each upside attempt and that market remains “Overbought” on larger cycles is indication of larger cycle vulnerability. Market’s inability to overcome sellers could be a clue environment has begun to shift from one of buying on weakness to one of selling on strength.

Marked increase in trading volume on downside during recent decline as reflected in Cumulative Volume suggests S&P 500, S&P 500 Emini, and Dow Jones 30 should be trading lower that current bids suggest. Last time such volume losses developed was during 2008-2009 bear market.